Japan to target Amazon, Google and other non-resident B2C digital service providers

Plans to subject to Japanese Consumption Tax the provision of electronic and digital services to consumers by non-resident providers have progressed. The Government Tax Commission last month discussed further details following the announcement earlier this year of plans to levy Consumption Tax on B2C foreign internet services.

The changes will affect such services as: music and film downloads; e-books; cloud software; internet telephony; and online games. The major providers for these services are: Amazon; Skype; Google; Microsoft; Apple and i-Tunes.

Whilst not date has been fixed for any changes, they could come as soon as October 2015.

Change in Digital Place of Supply Rules to help local digital companies

Currently, the Japanese indirect tax regime does not provide for taxation on digital services provided to its population from outside of the country. It follows the destination principle, meaning a potential tax liability only arises based on the main residency of the service provider – thereby effectively exempting foreign companies.

The Commission has therefore proposed that the Place of Supply (and therefore taxation) should be switched to the location of the consumer. This would follow the latest OECD digital tax guidelines issued earlier this year, and the original Ottawa Taxation Framework which set the broad principles for the implementation of VAT systems. The EU was this first to adopts this principle of levying VAT based on the rules of the country where the consumer is located. From 2015 electronic services for B2C by EU companies will change to being subject to VAT in the country of the consumer. It is already based on the country of the consumer for digital consumer services by companies outside of the EU.

Impact on foreign B2C digital services

The Japanese government will look to implement the changes either this Autumn or in 2015. The effects for non-resident will include:

The technical ability to identify the location of their consumers, typically by IP address or credit card address

The need to determine B2B (still zero rated under reverse charge rules) and B2C customers which will now be liable to the indirect tax

The obligation to register with the Japanese tax office as a Consumption Tax payer

Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.